Look Mortality in the Eye Without Flinching: Simple Estate Planning

What is Bayalis, you say? The answer is 42 in Hindi, or the age at which Mrs. BITA plans to be financially independent. Mrs. BITA and her husband are raising a family in one of the highest cost of living areas in this great nation, and are managing to get far ahead in spite of the high rent district.

They are also planning for a future beyond their FIRE timeline, as you will learn from today’s article. I had the pleasure of meeting Mrs. BITA a week ago at FinCon and sharing an Uber on the way back to the airport because that’s what FI types do.

Take it away, Mrs B!

I see you, you industrious Ant, saving and investing for a rainy day. Your asset allocation is just right, your expense ratios are lower than the inhibitions at a frat house party, and your savings rate is higher than a proverbial kite. You are prepared for Life. But are you prepared for Life’s grim twin, the Not-So-Jolly Reaper? What if, heaven forbid little Ant, the Boot of Life chooses to stomp you flat this day?

If you, like me, do not relish facing your own mortality, chances are that if you were to kick the bucket, your affairs would not quite be in order. Now, if you are going to leave behind nobody who depends on you, or if you do not give two hoots about what happens to your hard-earned cash once you are six feet under, let me save you some time. Exit this post. Do not pass Go. Do not collect $200.

For those of you who have chosen to hang around, today we are going to go toe-to-toe with our mortality and our weapon of choice will be an Estate Plan.

What is an Estate Plan?

An Estate Plan typically involves creating the following:

A Living Trust

Wills

Power of Attorney for Finances and

Power of Attorney for Healthcare Decisions and Advanced Health Directives

“Whoa!” say you, “What a lot of documents!” Well, you are up against Death. Would you rather face Death with a plastic fork or an arsenal of modern weaponry?

We will go over the different components of the estate plan and see why each one is both worthy and necessary.

Preparing to Create Your Estate Plan

Before you actually work with a lawyer to set up your estate plan, you are going to have to do some homework. Here is a list of things you must figure out in order to draw up your estate plan:

This is really the hardest part of the process. It requires you to search your soul and face some unpleasant truths. If you aren’t single, it is going to require you to sit down and have heart-to-heart conversations with your better half. It isn’t an easy thing to agree on who should get custody of your children, or to find out that while you want to pull the plug and donate all your organs, your spouse wants drastic measures and plans to refuse an autopsy.

It isn’t easy, but it is the responsible, adult thing to do. Being an adult means that you can eat all the chocolate you want and binge watch Netflix. It also means that you have to do the right thing, even when that thing isn’t particularly pleasant or fun.

Now that you’ve done the hard work, let’s dive into the details of each weapon in your Mortality Arsenal.

A Revocable Living Trust

In this article we discuss revocable living trusts. The other kind are irrevocable trusts, and I’m not as well versed in those, so I shall say nothing about them.

A living trust is a legal document that contains instructions for what you want to have happen to your assets when you die. The term revocable indicates that you can revise the plan during the course of your life or even scrap it completely.

A Living Trust allows you to avoid probate. Probate is a court-supervised process for transferring a deceased person’s assets to their beneficiaries. If you die with only a will, your beneficiaries have to go through probate to gain access to your assets. Let us count the ways in which probate is detrimental to your beneficiaries:

Lack of privacy. Probate is a public process. Your assets will be a matter of public record, as well as who gets what.

Time consuming. The probate process can take a while. My lawyer said that it isn’t uncommon for the process to take nine months to two years. Until probate is done, your beneficiaries can’t touch any of the assets.

Expense. Probate fees are set by law, vary based on state and can be significant. In California for example, probate fees are 4% of the first $100,000 of the gross value of the estate, 3% of the next $100,000, 2% of the next $800,000 and 1% of the next $9 million. In addition there are flat fees like the cost of filing for probate.

Sold on the need for a living trust yet? I thought you would be. Now let’s talk about some trust-related terminology and other nitty-gritty trust details.

Settlors a.k.a. Trustors a.k.a. Grantors All these terms refer to the person(s) who create the trust. In our case Mr. BITA and I are the settlors, trustors and grantors of our living trust.

Trustees This is the person(s) charged with managing the trust. While we are alive and of sound mind and health, Mr. BITA and I are the trustees of our trust. The trust document specifies one or more successor trustees. Remember those trusted folks I asked you to pick earlier on? Those will be your successor trustees. Once you shuffle off this mortal coil, your successor trustees will tend to the care and feeding of the assets in your trust until your beneficiaries inherit your assets.

Beneficiaries As the name suggests, the person(s) who benefit from the trust. This is the person who will inherit the assets placed in the trust. The trust document states at what age control of the assets pass from the successor trustee(s) to the beneficiary. Our document gives Toddler BITA control of our assets when she turns 30.

The lawyer that you work with will help you create and notarize your trust, making it nice and official. Your trust will have a name. I dearly wanted to name ours DisTrust (as opposed to Dat Trust, you know), but it ended up with a much more boring name: The BITA family Revocable Trust.

As the years go by, you may need to amend your trust (e.g. you have a new baby or one of your trustees dies or moves out of the country). You cannot amend the trust yourself. You will need to contact a lawyer to make changes to the trust.

Once you have a living trust, the trust must be made the owner of all your assets (or co-owner, depending on the asset type). I’ll talk about this some more later on, when I discuss funding your trust.

The Will

Even if you have a living trust, you still need a will. A will serves two purposes when there is also a living trust in place:

The will serves as a catch-all for anything not explicitly owned by the trust (e.g. your cars). This kind of will is called a pour-over will and it basically states that all your property should be ‘poured’ into your trust at the time of your death and will be managed by your Trustee.

A Living Trust deals with your assets. It cannot deal with your children. If you need to specify guardians for your minor children, this information needs to go into the will.

While the guardian will have no control over your assets (unless you choose the same person to be both guardian and trustee), they can petition your trustee for money (e.g. a monthly stipend) to cover the costs of raising your child. They are also allowed to ask the trustee to give them financial statements of the trust holdings at regular intervals. This allows them to keep an eye on your trustee and ensure that your assets are being managed in good faith until your child(ren) inherit(s).

Power of Attorney for Finances

This is a document in which you state who is authorized to make financial decisions on your behalf if you are not of sound mind. In my case, my husband will make decisions for me if he is alive and well. If he is not, next in line are our trustees.

Declaring someone incompetent to handle their own finances is not something that is taken lightly. It requires two licensed physicians not related by blood or marriage to you or your beneficiaries to declare you unfit.

Power of Attorney for Healthcare Decisions and Advanced Health Directives

These give your nominee(s) (also known as your conservator(s)) the power to make medical decisions on your behalf. It also lets you specify your desires for certain specific medical situations, and your conservator is required to honor your wishes. My document let me specify such fun things as what my conservator should do if I turned into a vegetable, whether or not I wanted to donate my organs, and if so, which ones, and how I wanted to dispose of my remains.

Funding the Trust

Think of the living trust as a container for all your assets. When a trust is created, it is an empty container. For the trust to be an effective tool you must fund your trust by moving your assets into the control of the trust.

Your Trust Must Own Your Property

The deed to your house must be modified to indicate that your trust owns the property (in addition to you and, if applicable, your spouse). This was something our lawyers handled for us. If you purchase new real estate in the future, it must be in the name of your trust.

Owned by the Living Trust

Your Trust Must Own All Your Non-Retirement Accounts

Once you have created a living trust you have to transfer title on all your accounts to your living trust. How exactly you do this will depend on the particular bank in question. I can tell you what our lawyers told us about some of the institutions we bank with:

Chase and Bank of America require you to visit a local branch to perform the transfer. The banker might need to see your Trust Certificate (a document that was created by our lawyers) in order to perform the transfer.

For Vanguard and Schwab, you can call and request Trust Account Forms, which you fill and send back to the institution.

Capital One does not support accounts that are owned by a Living Trust. This really annoyed me, because I’ve banked with Capital One for years. Ally Bank, here I come!

When you open new accounts in the future you must do so in the name of your trust. If you are in the business of churning bank accounts for bonuses, your Living Trust could make your hobby onerous. On the other hand, those accounts will likely contain a small amount of money, and will be short lived, so I wouldn’t bother putting them into the trust.

Your Trust and Retirement Accounts

Your retirement accounts cannot be owned by the trust. So for your 401ks and IRAs you need to ensure that you have a beneficiary and contingent beneficiaries set up correctly. Retirement accounts are exempt from probate.

Life Insurance

If you have a life insurance policy, and your spouse is your primary beneficiary, you must make the trust your contingent beneficiary.

College Savings Plans

Incentive Stock Accounts

If you receive stock from your employer as part of your compensation (e.g. Restricted Stock Units or Employee Stock Purchase Plans), and your employer opens an account on your behalf to hold this stock, you typically cannot transfer these accounts to your trust.

What you need to do instead is open a new ‘trust’ account with the financial institution in question, and link the trust account to the account opened by your company. Then you can set up an automatic transfer so that as soon as your stock vests, it is transferred to the linked trust account.

Operating Trust-owned Accounts

Having your accounts held in the name of the trust doesn’t change anything on a day-to-day basis. You can still sign checks in your own name, or purchase index funds in your brokerage accounts, etc. Nothing changes at tax time either – you file your taxes exactly as you did before. If you are ever asked for the the Trust ID or the Trust Tax ID, it is the social security number of any grantor (a.k.a trustee) of the trust.

How Much Does Estate Planning Cost?

The firm we used said that they charge $1,800 to put together an estate plan like the one detailed in this post. Obviously this number will vary widely by region. My company offers a Legal Plan benefit. If you sign up during open enrollment, they deduct $9 from every paycheck, but then the Legal Plan picks up the bulk of the costs if you do consult a lawyer. So we paid $9 * 26 plus $220 out of pocket for our estate plan – a grand total of $454. If you have access to such a benefit, I would strongly recommend looking into it.

Protect Your Assets and Your Dependents

We drew up our estate plan less than a month ago. My daughter is 3 years old, so believe me when I say that I understand how not-fun this is, and how much easier it is to procrastinate than face your mortality head-on and plan for it. You’ve worked hard to build your asset base. Now (wo)man up, and put a plan in place to protect it and those that will be left behind. Let money be the least of their concerns in their time of grief.

[PoF: Thank you for a solid overview, Mrs. BITA. Readers, do you have your ducks in a row when it comes to estate planning? Do you see a need for a trust in your estate plan? Let us know in the comment box below!]

Oh, and don’t forget to subscribe if you haven’t already. Doesn’t cost a thing.

39 comments

Do you mind me asking a ballpark amount of assets that you did this for? Just trying to see if there is a cost benefit of going through and setting up a living trust when your assets may not be that large.

Wow, this is in depth and I will be getting this done immediately! I’ve been putting the estate planning towards the bottom of my list of to-do’s for a LONG time because of how daunting it is.

This posts will help guide me in getting it all done. The other reason why I’ve put it aside is because I was quoted $3000 to get it completed and I’ve been waiting to get more information to see if we can get the planning for less. I will have to scour to find a less expensive option.

I created my estate plan earlier this year after a health scare with my dad. Ironically or thankfully last Thanksgiving he had showed me the big binder, and we discussed that he and my step mom had a plan. Which was went a long way for my peace of mind as he was put into a medical coma, knowing he and my step mom planned what she was supposed to do. I’m single, I hadn’t worried about a will before, but now I own a condo, and with the scare with dad, having a back up plan outlined if my parents pre-decease me is a good idea. Obviously I hope my siblings are still around, but on the rare chance a meteor (meteorite?) takes out the house at Thanksgiving and we all go at once, I picked some friends to benefit. Adding the powers of attorney for financial and medical decisions was also important. When I’d briefly discussed it with my sister a few years ago she said she didn’t think she’d be up to it. After everything with dad, she said she wouldn’t want anyone else deciding. 🙂 Dad had some brain delays during recovery, (and is doing great now), but again that peace of mind knowing my trusted person could keep bills squared away if I wasn’t up to the task is reassuring. Shortly before dad’s thing, a former coworker died suddenly of an unknown / undiagnosed heart issue at age 38. A coworker had passed in a tragic car accident 2 weeks before that, around age 40. With all 3 events I decided it was time to get things in order. My work place offers a program that gives you a free 30 min consult to pick your lawyer/ attorney and then a discount if you use their services. Thank you Mrs. BITA for sharing your insights and experience. 🙂

This is great, Mrs. BITA! Well, as great as planning for death can be, I guess.

Just the other day, a friend of ours discovered that his recently-deceased brother did not have a trust set up (as was previously thought) and the estate will be in probate for a year, with the associated costs. It has been stressful and costly.

My wife and I have been woefully negligent in creating these documents, but the recent birth of our second child, our friend’s situation, and this post have officially lit a fire under our butts.

We had this on our to-do list for far too long. It was such a relief to be able to mark it done. I highly recommend doing it – apart from it being good for your family, you will also get to pat yourself on your back and strut around for about a week being so proud of yourself for #adulting.

The benefit is great not just in terms of cost, but in terms of putting a deadline on getting it done. We had procrastinated for so long, but once we signed up for the plan and were subject to payroll deductions, it became a question of ‘get it done or you’ve just thrown that money away’.

The pain of probate appears to be worse than root canal treatment without anesthesia.

We have a revocable trust and this article is a timely reminder to tidy things up that are not yet in it or need updating. e.g. guardians list details.

I did not know (maybe I forgot….) the thing about 401k’s and IRA’s not being owned by the trust. Good to know as we are getting closer to retiring and will be rolling over two 401k’s and a cash balance pension into our IRA’s.

I took the DART train back to DFW – nobody asked me for payment on the train since the ticket machine was not functioning when I got to the station. Frugal win there! Also spent the train journey chatting to Todd Tressider from the Financial Mentor, which was another win.

Thank you for allowing me real estate on your site PoF, and thanks again to you and the WoWs for sharing your cab to the airport. I enjoyed meeting you and your wife at Fincon. I was especially grateful when she rescued me from the situation where I was sitting at Draft, across from 6 bloggers, all of whom were watching football, while I slowly died of boredom.

As an estate planning attorney, I rarely end up recommending a revocable living trust to my clients under the age of 60 or 65. In the State of New York Probate fees and timing issues are just not that big of a deal, and 97% of the people with RLTs look at me like I am nuts when I ask if they were properly funded. For example, lets say you own a business and those shares are not in the RLT – you are going through probate anyway!

The topic varies state to state, but the most important thing is that the docs match your testamentary intent so awesome work!

Interesting. We’re in NY and they didn’t think it was a big deal for us to look into a trust either… (I just turned 50.) We did go through the process and got everything else set up. They were important conversations and all the paperwork is now in place. It helps me sleep better (most nights!) too. Great write-up Mrs. BITA – and awesome hanging out with you last week!

Fire under butt lit: I actually spoke to an estate planning attorney yesterday. Interestingly, he recommended against a revocable living trust in my situation, and 99% of the time according to him.

Instead, in families with young children, he recommended a will which designated the creation of a trust upon death. That trust can then disperse payments to the children at ages designated by us, and gives the trustee discretion to make dispersement at any other time as well. He claimed a revocable trust makes more sense with a complicated (not necessarily large) estate or when children are no longer minors.

I’m still have more to discuss and read, but thanks for getting this process going with us.

We could do better in this department, too. We’ve got living wills (five wishes) and a will prepared by an attorney, but it’s probably overdue for an update, having been about five years. Whenever I look into the revocable trust, I realize that the vast majority of our assets already have a beneficiary, and our real estate situation seems to be in perpetual flux, so re-titling seems like a hassle not worth going through. But I will admit my knowledge and preparedness is stronger when it comes to investing when compared to asset protection and estate planning.

Thanks for the great article. It gave me the prompt to review my current situation. I had all this set up about 2 years ago, but my attorneys set it up in a slightly different way for better asset protection. I thought I’d share. I’ll admit now to only partially understanding the set up so sorry if I confuse people. (as I’m a little confused myself)

We have a Limited Partnership set up which is 2% owned by the General Partner (which is one of one of our LLCs), 49% owned by myself, 49% owned by my husband. The Limited Partnership hold all safe assets like bank accounts, investment accounts, jewelry, but not cars/real estate and not retirement accounts.

We have a LLC which is the General Partner of our Limited Partnership. The LLC is owned 50% by myself and 50% by my husband.

The LLC is under our Living Trust.

We are currently renting (started a new job) but when we owned our home, it was actually owned by another LLC, and we owned the LLC. This is how “unsafe” assets are held.

If we are sued, are assets in the Limited Partnership are protected. If both my husband and I die at the same time, we don’t own our assets, our companies do, so it avoids probate and to who we specify gets our companies.

We made a will before we left for pilgrimage for religious reasons a few years back. At that time I made sure my son and wife were designated beneficiaries for all account But we have to update it to include more specifics on accounts and allocations. Thanks for this reminder 🙂

I consulted an estate planning attorney who recommended these same documents, the living trust being the most expensive. However, after researching the issue I decided not to proceed with a living trust. Here is why:

1. All major financial accounts are transferred to heirs by simply listing them as beneficiaries on the account. This takes precedence over a will or living trust, and it completely avoids probate. This includes brokerage accounts (like Fidelity or Vanguard), and bank accounts (CDs, savings accounts, etc.). This is the bulk of my assets.

2. The only major assets that have not traditionally been able to pass through beneficiary designation have been real estate and vehicles. In recent years this has changed in many states, including mine. In Oklahoma, for example, both real estate and vehicles can pass to heirs via beneficiary designation on the deed/title. Forms are available to do this from the county clerk and tag agency.

3. Life insurance always passes to the beneficiary without probate.

4. Retirement accounts (IRAs, 401ks, etc.) also pass to beneficiaries by designation on the accounts.

Thus, all of my financial assets pass to my heirs immediately without probate. No cost or trouble to set up a living trust. My attorney wanted $6800.

That leaves only my personal belongings and I can pass those through a simple will I create on my own (or with an attorney if you choose). The value of these assets is de minimus. Most states also have special procedures to handle probate for small “probate estates” like this, which involves filing a paper with the clerk, or a simple procedure .